DP7436 When Everyone Runs for the Exit

Author(s): Lasse Heje Pedersen
Publication Date: August 2009
Keyword(s): asset pricing, crisis, liquidity risk, quant, risk management, run, unconventional monetary policy
JEL(s): E2, E44, E52, G1, G11, G12, G2
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7436

The dangers of shouting ``fire'' in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade when the dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.